Have fixed rates finally peaked after hitting 20+ year highs? Carriers begin announcing drops.
Almost everybody in the United States knows that interest rates have been climbing relentlessly for a long time. Even kids know this because most parents have complained more than once about their financial pain. After all, the Federal Reserve has increased its benchmark interest rate 11 times since March 2022.
Fed chairman Jerome Powell has indicated that he may have to increase rates still a bit more. So folks interested in investing in fixed annuities and money market funds and other fixed interest investments may be smart to hold off a little longer and reap even a higher return, right?
Almost certainly not.
The odds are strong – in fact, very strong – that rates will gradually head down in 2024. So people interested in investing in, say, a plain vanilla fixed annuity but waiting for rates to climb a smidgeon higher may want to consider pulling the purchase trigger now or at least by the end of the year. Two annuity purveyors – Athene and Delaware Life – just cut rates on plain vanilla annuities for the first time in a long time in late November and are highly likely to be followed by other annuity players in coming weeks.
“Interest rates have peaked and will soon start coming down, and this will impact fixed annuities because they move in the same direction,” says an annuity professional who has been closely following interest rate trend lines and prospects.
This is hardly the only person knowledgeable about financial trends who thinks this way. A growing number of shrewd financial experts have also started saying this very recently, reflecting fresh signs that interest rate prospects are on the cusp of flip-flopping. As recently as this summer, market analysts and reporters were pondering how many more times the Federal Reserve would hike interest rates. Shortly afterward, a couple of top-level Federal Reserve executives suddenly mentioned that they might start cutting, not increasing, rates in 2024.
This quietly unveiled the initial sign that the Federal Reserve’s multi-month mantra that benchmark rates would be “higher for longer” to get inflation down was on the verge of becoming obsolete.
It wasn’t that some members of Fed brass knew ahead of time about October’s unusually soft consumer price inflation report, which suddenly persuaded the market that relatively speedy interest cuts lie ahead and substantially increased prices. Rather, it was a new observation that if the Fed didn’t cut rates at some point, real – or-adjusted-for- inflation – interest rates would keep rising and probably spark a recession unnecessarily.
The growing conventional view is that the Fed will cut interest rates about one percentage point by the end of 2024, likely starting in May and probably in quarter percentage point increments. And it’s possible that the trend line will be more pronounced. For example, Jeremy Siegel, the prominent finance professor at the University of Pennsylvania’s Wharton School of Business, believes rate cuts will start in March.
Depending upon how quickly (or not so quickly) the inflation rate will continue to decline, interest rates may also be trimmed more than one percentage point next year. The Fed’s goal is to ultimately cut inflation to about 2%, compared to 3.2% currently, and a 9.1% peak in June 2022.
All of this, of course, will substantially impact the payout rates of fixed annuities. At this point, they have already about doubled over the past five years, including 20% to 25% alone since the start of 2022. Currently, investors who purchase $100,000 today in a fixed annuity in a prominent insurance company purveyor enjoy an annual payout rate of roughly 5.9% in a three-year fixed annuity and 6.2% in a five-year fixed annuity, according to research by Annuity FYI. These are the highest payout rates in more than 20 years.
Payout rates are also at 20-plus year highs among immediate annuities and highly popular fixed income annuities. Their rates, just like plain vanilla annuities, will drop in the aftermath of Fed rate cuts.
Prospective investors may be wise to not limit themselves to the purchase of a fixed annuity. They may also want to take another look at a potential investment in a stock market-oriented annuity, such as a so-called structured annuity.
Lower interest rates – even just the prospect of lower rates — tend to be a stimulant for the stock market, which is why the stock market has been on a roll lately. A typical, so-called structured annuity, for example, can protect investors from the first 10 percentage point decline in the underlying index, such as the S&P 500. Structured investors have also reaped potential returns of well over 100% of market index performance if they invest in a so-called low-volatility index, which is more diversified than a pure stock index.
Whether prospective investors decide to buy a select annuity or not, they would be wise to at least take a hard look at one or two. This will make it abundantly obvious how attractive annuity payouts are today. Good times never last indefinitely. Think about this — before most, if not all, insurance companies follow in the footsteps of other players and temper their interest payout offer.
For those considering purchasing a fixed annuity, rates can be tracked using Annuity FYI’s real-time fixed rates table.
